It stipulates: "Israel is the historical homeland of the Jewish people and they have an exclusive right to national self-determination in it".
Israeli Prime Minister Benjamin Netanyahu has hailed the legislation, describing its passage as a "defining moment for Zionism and Israel".
He called on the global community to reject and condemn this racist law and to confront all Israeli racist laws and policies aimed at undermining the vision of a two-state solution. "No racist law will undermine the rights of our people".
It also noted that tens of thousands of Palestinians in the city are in danger of having their homes demolished for being built without licenses because the municipality of the city systematically does not issue building permits for them.
In Brussels, a spokeswoman for European Union foreign affairs chief Federica Mogherini expressed concern at the move and said it would complicate a two-state solution to the Israel-Palestinian conflict.
The Israel Land Fund, whose stated goal is "acquiring all the Land of Israel for the Jewish people", advertised on its website after the court decision six months ago for "4 idealistic families" willing to move into the homes.
The law also demotes Arabic, leaving Hebrew the only official language.
We cannot have any official interaction with an Apartheid State, and that is exactly what the Israeli Knesset has just passed into law last week.
Israel's Arab citizens number some 1.8 million, about 20 percent of the 9 million population.
Lawmakers removed the most contentious clause of the bill on Sunday, which would have allowed the establishment of "Jewish-only communities" and which critics had called racist.
"The illegitimate and racist Zionist regime has been established on the foundation of the occupation of Palestinian territories and the massacre of their true owners, and Israel's parliament recent act is yet another attestation of the racist nature of this regime over the past 70 years", Qassemi added.
Those who stayed have equal rights under law but say they face constant discrimination, citing inferior services and unfair allocations for education, health and housing.